The Serious Fraud Office has abandoned its investigation into the Mayfair property tycoon Vincent Tchenguiz 15 months after investigators raided his home and offices using a flawed search warrant as part of the SFO's biggest inquiry in almost a decade.

The move comes after the agency admitted in February that its original warrant in relation to Vincent Tchenguiz had been "inadvertently miscast" and should be quashed. A parallel inquiry continues into suspected corruption involving Vincent's brother Robert Tchenguiz and senior figures at the now-failed Icelandic bank Kaupthing.

The error is expected to cost the taxpayer tens of millions of pounds in special damages. In addition, lawyers for Vincent Tchenguiz have indicated they will be seeking aggravated and exemplary damages, whereby the final bill could top £100m. This would be many times the SFO's annual budget, which is due to drop to less than £30m in two years' time.

In a statement, Vincent Tchenguiz said: "It is nearly 15 months since the SFO had me arrested – in a publicity-driven dawn raid. Since that time I have maintained my innocence. I have consistently explained to the SFO that they had got it completely wrong – but, as their investigation collapsed around their ears, they stubbornly maintained that they regarded me as a suspect. The damage to my reputation and the business has been massive.

"It is a huge relief that, under the new director of the SFO, this shadow has now been lifted and I can get on with rebuilding my life and my business interests. The damage, however, has still to be accounted for," he said.

The previous SFO boss, Richard Alderman, had been reluctant to end the investigation into Vincent Tchenguiz but his successor, David Green QC, who took over in April, wrote to the property tycoon, who is a leading Conservative party donor, on Monday confirming he was no longer a suspect in the agency's inquiries.

In March last year the SFO had wrongly told the judge who granted the warrant that Vincent Tchenguiz had lied about the value of assets – investments in tens of thousands of UK residential freeholds – pledged to Kaupthing, by failing to mention a priority pledged to other senior lenders. In fact, bank paperwork showed these senior lenders had been fully declared.

Dawn searches of Vincent Tchenguiz's home and Park Lane offices were part of a co-ordinated series of raids in London and Reykjavik in March last year, targeting a handful of senior former Kaupthing bankers, the two brothers and their chief lieutenants. No charges have been brought and all deny wrongdoing.

The Tchenguiz brothers have themselves claimed to be among the biggest victims of Kaupthing's collapse in 2008, filing civil claims accusing the bank's former executives of "fraudulent misrepresentation". These claims have since been dropped.

The 2008 collapse of Kaupthing and its subsidiaries – including the British bank KSF, which had attracted billions of pounds in online deposits from British savers through its Kaupthing Edge account – have led to a string of civil and criminal allegations of fraud around the world. No one has yet been prosecuted.

Aggravating the impact of the bungled warrant application, Alderman used SFO powers in effect to prevent the return of documents wrongfully taken from Tchenguiz in raids in March last year, ensuring they were kept under lock and key at a firm of lawyers.

However, Alderman's successor Green quickly promised the documents would be returned and pledged to conduct a rapid review of the merits of continuing a fraud investigation into Vincent Tchenguiz. It is this review that led him to write to the property tycoon and inform him he was no longer a suspect in the SFO's inquiries.

In an unusual step, this review was made public last month during a judicial review of the SFO's actions brought by the brothers. The judgment is still awaited.

During the hearing, Vincent Tchenguiz's lawyers accused the SFO of clinging to suspicions about the property entrepreneur "like Mr Micawber, in the hope that something will turn up".